Federal Agricultural Mortgage Corp. (NYSE:AGM)

The Company provides agricultural real estate and rural housing mortgage loans to increase the availability of long-term credit at stable interest rates to American farmers, ranchers and rural homeowners.

Such an interesting story. The company went to $2 in 2008 along with a lot of other lenders, but the reason they fell was not a bad loan book. They had put their excess reserves into Fannie stock and Lehman stock, and when those companies went down their capital and liquidity dried up. Company lends to farmers and has low loan losses, trades at 6x core earnings and has a book value of $17. With ag prices high and rising I think business will continue to boom.

AGM (Farmer Mac) does not just loan on agriculture. Their charter changed in May '08 allowing for lending in rural utilities & telecom. The reason significant expansion was delayed was Lehman, and Fannie/Freddie write offs on AGM's balance sheet in Fall of '08 leading to the almost complete depletion of capital reserves and the dive of AGM PPS. Farm Credit system and others bought newly issued preferred shares to restore capital within a few months.

GAAP profits of '09 restored $120 million of the capital from the $150 million in original preferred issue. Instead of a pay down, preferred shares were restructured (announced on January 25, 2010) reducing dividend expense and increasing excess capital by an additional $100 million. 1Q earnings report leaves current existing excess capital of 195 million upon preferred restructure. New growth available depending on pending capital requirement changes could be double AGM's existing 10.7 billion loan volume.

Taken from the annual report for AGM "Beginning in August 2009, the majority of Farmer Mac’s rural utilities business was direct purchases of distribution cooperative rural utilities loans, and this trend of purchasing eligible rural utilities loans, as opposed to guaranteeing general obligations secured by eligible loans in AgVantage transactions, is expected to continue for the foreseeable future under the Rural Utilities program. In late 2009, Farmer Mac developed underwriting standards for the purchase of loans to G&T cooperatives and expects to see purchase requests for these types of rural utilities loans by mid-year 2010."

What do you see happening with the electrical grid, wind and solar farms? Major upgrades and expansion. AGM can loan on any cooperative electric so those types of projects are not the limits. Do you need a bigger neon sign? American Power Act will make development in these sectors even bigger if passed. Lumping this GSE with FNM/FRE is a major mistake.

1. AGM primarily involved with lending and financing to small family owned agriculture farms/ranches. This real estate has been "fairly valued" and not subject to the same over valuations of residential and commercial concerns. There is a fixed amount of agricultural use land which keeps the values more in line with valuations. In other words there should not be a disrupting amount of land coming up for sale at any time during the normal course of economic events.

2. The repeal of the federal estate tax for 2010 offers a temprary relief which could become permanent. The capital gains tax is not a concern until a sale occurs. Without an estate tax there will be one less potential problem for the farm or ranch owner. Going to a value added or consumption tax will the situation even better for lenders and borrowers because farmers and ranchers produce much of what others will be taxes on. This leads to economic stability.

3. Performing loans, low interest rates and proper valuations continue to make this a top pick.